D-man on derivatives
Cash is the ultimate financial derivative, according to Emanuel Derman.
One airy invention is the PIK (payment-in-kind) bond, a loan that pays its promised interest in additional bonds of the same kind, as opposed to solid cash. It sounds insubstantial, a barely disguised pyramid scheme in which you make your promised payments each time with further promises of payment, each at least as chancy as a subprime CDO. But think about the dollar: deposit it in the bank for a year and you get more dollars at the end. What is paper money but a PIK, an early derivatives contract? To trust it you have to trust the country that provide its value, and the same is true of payment in kind. Used wisely, maybe payment in kind can serve as hallmark of trust in the financial supply chain too.